This was cross-posted on our Expect[ed] Loss blog Credit risk ratings are becoming a risky business. Yesterday’s filing of the complaint against S&P (MHP) centers, in essence, on the allegation of false advertising. Stepping in to this issue for a moment, one of the key defenses offered by the raters is that their ratings are… [Read more…]
November 16, 2011
The last couple of weeks have provided plenty of entertaining media coverage if you’re a follower of rating agency activities. First up, the Philadelphia Inquirer ran a story that suggests Collingswood NJ Mayor Jim Maley had failed to persuade Moody’s to adjust the borough’s rating. Apparently, Moody’s had previously acknowledged that in its prior rating action,… [Read more…]
September 23, 2011
We have regularly written about the need to encourage rating agencies to be accurate and objective. Last week, the Reason Foundation submitted a comment letter to the SEC that suggests an interesting angle to promoting healthy ratings competition. First things first though. We think it’s unhealthy to simply promote ratings competition. That tends to lead… [Read more…]
August 18, 2011
Our most recent regulatory submission is available by clicking here. We delve into various rating agency conflicts that may hinder or impair the provision of objective credit ratings; and we offer ways to minimize or circumvent these “distractions.”
August 4, 2011
Some interesting / important excerpts from South Africa’s draft bill for credit rating agencies: General duties 7.(1) A credit rating agency must – … (j) ensure that it at all times has the necessary knowledge and experience to issue credit ratings and perform its credit rating services; Methodologies, models and key rating assumptions… [Read more…]
July 18, 2011
Reuters came out with an analytical article this morning which doesn’t bode well for the continued use of credit ratings. (See Analysis: Investors break their bonds to ratings agencies.) It may be generally agreeable that several mistakes were made that (1) enabled credit raters to become too powerful, (2) allowed for their performance to continue unmeasured, unmeasurable and unaudited,… [Read more…]
June 15, 2011
In what ought to have been a positive development, the Securities and Exchange Board of India (SEBI) announced today its standardisation of ratings symbols and definitions. The standardisation of symbols ought to be a good thing — it’s something we’ve long been lobbying for (see for example our Feb. 2010 piece on “Economies of (Ratings) Scales“) as… [Read more…]
June 10, 2011
This numerous conflicts of interest inherent in the credit ratings model, as it stands, are not new. Some of them are difficult to solve, others easier. Our general approach has been to recommend the removal, to the extent possible, of all external business incentives from the delivery of the ratings themselves. Given many of the larger credit… [Read more…]
March 16, 2011
Our recent submission to the European Commission sought, among other things, to “warn the Commission of the potentially unintended consequences of increasing ratings competition.” This is important: the drive to increase ratings competition is associated with the economic principle that increased competition lends itself to a greater value proposition. We wanted to warn the EC… [Read more…]
March 1, 2011
It’s different buying a bond rated AAA by one rating agency versus a bond rated AAA by one agency and AA by another. But what happens if the issuer chooses (conveniently) not to disclose the AA rating? Well, you might assume that one only rating was sought, and hence only one was provided. At a… [Read more…]
February 23, 2011
THIS POST IS PROVIDED BY A CONTRIBUTOR WHO WISHES TO REMAIN ANONYMOUS Golden Knight II CLO, Ltd., issued in March 2007, is a collateralized loan obligation backed primarily by a portfolio of senior secured loans. In July 2009, when Moody’s downgraded to single C the class E notes issued by Golden Knight II, it sparked my interest:… [Read more…]
February 9, 2011
We are a big fan of a clearly articulated ratings methodology and approach: it allows users to trust, but verify, to the extent they wish to perform their own due diligence. If a methodology is well defined, users can spot when the rating agencies have slipped up and encourage them to correct it. This provides a positive,… [Read more…]
November 24, 2010
Our recent submission to the SEC calls for the monitoring of what’s called a rating agency “Type II” error – the tendency to rate too low an issuer that does not subsequently default. In the corporate world, a low debt rating often hinders an issuer’s ability to issue debt and typically makes any debt issued… [Read more…]
November 17, 2010
The Lex team at the Financial Times introduced last week an article that intimates that Chinese rating agency Dagong’s credit ratings might be worth considering because certain of them are closely aligned, in the FT’s opinion, to the credit default swap (CDS) market spreads. Fitch Ratings’ Grossman and Hansen pulled them up in a comment letter… [Read more…]
October 22, 2010
As mentioned in our previous blog entry, we have been tracking ratings performance. The following is an example of something that opens our eyes, and would be humorous if only it weren’t so serious, or so regular an occurrence. On March 4, 2010 S&P downgraded Structured Asset Mortgage Investments Trust 2003-CL1 (CUSIP 86358HSY6) from AAA… [Read more…]
October 8, 2010
We have completed an initial analysis that considers the dual influences of regulatory reforms implemented, and market pressures exerted on the SEC-approved rating agencies (the NRSROs). Considering ratings data made available on their websites, we have noted a striking increase in ratings surveillance activity among all three of the NRSROs we examined. If one goal… [Read more…]
January 26, 2012
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